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European rates set to rise
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November 2, 1999: 11:31 a.m. ET
Financial markets expect ECB, Bank of England to push through rate hikes
By Staff Writer Doug Cameron
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LONDON (CNNfn) - European financial markets are prepared for a brace of interest rate hikes Thursday, amid solid evidence of an established economic recovery and rising inflation pressures.
The European Central Bank's 17-member governing council will gather for the 10th time in Frankfurt Thursday to weigh the latest evidence. This points to its first-ever rate hike decision after 10 turbulent months of managing monetary policy in the 11-nation euro-zone.
Senior ECB officials and the national central bank chiefs who make up the council have carefully prepared the ground for a rise over the last six weeks. They have struggled to counter criticism that their decision-making was opaque in its first few months .
Meanwhile, in London, the Bank of England's nine-member committee meets for the 30th time since gaining its independence from the government last year. It also is expected to push through a rate rise, though there appears to be less unanimity among members.
They will, won't they?
Independent economists were split when the two committees met in October, but this week's gatherings come in the wake of almost complete unanimity among observers. Rates will go up, with only a few dissenters believing that the moves will wait until early next year.
If the ECB in particular opts to wait for the first quarter of 2000, financial markets will feel cheated. ECB members have all but published their intentions in recent speeches, nodding sagely at recent economic data and carefully papering over what cracks remain in their interpretation of the numbers.
So confident are the pundits of this Thursday's action that both moves are pretty much priced into currency, bond and equity markets.
Wim Duisenberg, the ECB's snow-haired Dutch president, said at his last press conference that council members were unanimous in agreeing that their next move would be upwards, following the half-point rate cut to 2.5 percent made in April.
"Duisenberg gave the strongest possible hint that the ECB is on the verge of raising its refinancing rate," said Stephen Lewis, chief economist at Monument Derivatives in London. "The comments offer a clear pointer to tightening action," perhaps by as much as half a percentage point.
Since then, all the economic indicators -- and the carefully worded responses from policy makers -- have pointed toward a rise on Thursday, most likely by a quarter-point, though some are holding out for a half-point rise.
"All in all, this is a setting in which the ECB is naturally considering changing its monetary stance from very expansionary back towards more neutral but still expansionary," said Deutsche Bank's latest economic report on the region.
The 11-nation euro-zone's recovery is well established, while inflationary pressures are beginning to weigh on prices. They rose just 1.2 percent in August, well below the ECB's 2.5 percent reference target.
Industrial production rose 1 percent in the three months ending in August, while more forward-looking indicators -- notably business confidence surveys in France and Germany -- have posted unusually strong increases. The consumer confidence climate is less robust but, even in laggards such as Italy -- the euro-zone's third-largest economy -- the trend is clearly improving.
Structural change, what change?
The Bank of England has been more active at its 30 meetings, held in the more stately wood-paneled surrounding of the bank's headquarters in the City of London. Indeed, the committee has moved rates at no fewer than 13 of its gatherings. This month's meeting actually comes at a time when members have expressed increasingly divergent views in recent speeches.
The divide breaks down into whether members believe that the structure of the economy has fundamentally changed, allowing faster growth with reduced risk of inflation.
This argument has already raised a debate about whether the committee contains too many economists who typically provide completely different answers. There is also a question mark over its independence from the U.K. finance minister.
Recent economic data sets the scene for an intense debate over this question, with GDP growth hitting 0.9 percent in the third quarter. The latest survey of house prices -- a strong reason behind the September rise -- revealed a 12 percent jump in October, the highest for 12 years. Wages also continue to power ahead with a 5 percent rise last month.
Traditionalists -- those who believe there has been no big change in the U.K. economy -- point to static productivity gains, rampant wage claims and a strong pound keeping a lid on import prices as evidence of the need for a cut.
While the economists may argue theories, they cannot dispute the stimulative impact of the data. "It is hard to believe that discussion will be very constructive, given the fracas over organization and resources," said Lewis.
"If the [finance minister] fails to secure the rate rise for which he gave the green light last month, he will have only himself to blame. He may realize too late that he appointed the wrong sort of 'independents' to the committee."
The decision facing European policy-makers looks more clear-cut than that of the U.S. Federal Reserve rate committee, which is also widely expected to push through higher rates next month. The recent weak U.S. employment cost data cast doubt on the timing of the Fed's next move, despite weeks of careful grooming by its members.
The Fed has a better track record of setting expectations, largely through its approach of inserting "bias" notes in official policy pronouncements. These indicate the direction of the next move on rates.
Neither the ECB nor the Bank of England employ the bias mechanism but, after a month of "singing from the same song sheet," members of both rate committees have set themselves up to be knocked down if rates do not go up.
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